Payrolling benefits in kind

These changes represent a significant shift for all employers. Do not underestimate how complex they are, how many parts of your organisation they might affect, and just how long they will take to bed in. You will need to report even more data than is currently required, to provide a full breakdown of the benefits being reported through payroll, and to reflect Class 1A NIC being payrolled. In order to get prepared, you should:

• Have systems in place for calculating benefit in kind values required to be processed in payroll each pay period, including adjustments for joiners, leavers, and benefit changes
• Make sure that your data collection and payroll systems are ready for payrolling benefits
• Communicate the impact of the changes to your employees
• Ensure that you have modelled the financial impact of paying Class 1A NIC for both tax years 2026/27 and 2027/28 in the same tax year (employers) and for employees whose codes will be adjusted to collect tax on benefits in real time as well as underpayments for previous years where Forms P11D were prepared
• Establish an "end of year process" to use if you don’t know the value of benefits in kind during the year - for example, if the benefits were provided by 3rd party suppliers
• Get an agreement with HMRC by 5 April 2027 if you want to voluntarily payroll employment-related loans and accommodation- a timetable to mandatory payrolling of these benefits being published "in due course"
  
  

HMRC will provide the final specifications for software developers in the second half of 2026. This does not leave much time for software packages to be updated, tested and rolled out to employers.

You will need time to assess your readiness and get the systems in place for payrolling. You could consider payrolling some or all of your benefits from April 2026 on a voluntary basis, as this will provide an opportunity to “test” the system while P11Ds are still available as a backup. However, if you have not yet started this process then time is running out to be properly prepared for this option.

Speak to our employer tax team about payrolling benefits early.

Currently, the taxable value of benefits and expenses provided to employees must be reported via forms P11D and P11D(b) by 6 July following the end of the relevant tax year. The only exception is where the employer has chosen to voluntarily payroll benefits with HMRC agreement in advance of the introduction of mandatory payrolling.

Businesses calculate the amount to report, complete the forms and submit them to HMRC using proprietary software – only the smallest employers can use HMRC’s software.

Employees are issued with a P11D by their employer and pay the income tax due on their benefits, either through self-assessment or via an adjustment to their PAYE tax code.

Form P11D(b) is a dual-purpose return. It is a declaration that all the P11Ds are correct and complete, and a return of the Class 1A NIC payable. Therefore, although you may have payrolled every benefit given to your employees during the tax year, you will still have a Class 1A NIC liability and will still need to submit a P11D(b) and pay the NIC due. Employers must pay the relevant Class 1A National Insurance by 19 July following the end of the tax year, or 22 July for online payments.

Currently, employers can apply to payroll most benefits in kind (BIK) so that the benefit is reported and taxed under Real Time Information. This does not apply to accommodation benefit or loans with interest charged at less than the official rate, which must be reported on the P11D.

HMRC have stated they will remove all BIK from employee tax codes, excluding underpayments, prior to April 2027 so that they are taxed correctly when BIKs are reported in real-time. However, underpayments from previous tax years will still be included in the tax code.

Unsure of your business’ position? Speak to an expert now.

There will still be a light touch approach in the first year (unless errors are deliberate), but from 2028/29 onwards the penalty regime will follow payroll reporting where penalties and interest apply as PBIKs will be a payroll function from April 2027.

There are many areas where the impact of the change will need to be managed carefully in advance of April 2027 including communicating to your employees, establishing payroll processes and other administrative changes. Now is the time to review your processes and data to make sure you can report the correct benefit value each month. It may also be worth setting up flags to ensure that any changes are recognised in sufficient time to amend the amount payrolled.

You should also consider expert support for an ‘end of year’ check to make sure that you have payrolled the correct value by the end of the year. In practice, we often see errors as a result of practical issues that produce small under- or over-deductions of tax, so avoiding this is key.

1. Payroll process

   Decide who within your payroll or finance teams will be responsible for sourcing and collating benefits data, and checking taxable values are correct monthly. What will this process look like and will be it be robust enough to capture all the necessary information?

   Do your current payroll reporting systems need to be reviewed in line with the new expectations? Or will you need to implement a new process to cover this additional reporting requirement each pay period?

2. Joiners and leavers

   Employers will need to review monthly employee movement to ensure payroll reporting is correct for real time payroll reporting. Think about how you will communicate this to your employees. You should also consider how it may be more complicated for your payroll team and put training and processes in place to support them.

3. Benefits data

   If you provide company cars, there are complex rules to consider depending on fuel type, personal mileage reimbursement, or changes in cars. Your payroll team will need substantial information in order to report accurately.

   If you have a benefits provider, how quickly can the required pay period changes be sent through to your payroll team to ensure reporting deadlines are not missed?

4. Variable pay periods

   Do your current payroll process and records make it easy to calculate payments for employees with variable pay periods to feed into payroll in time to include correct benefit in kind amounts? Make sure you have clear documentation that lists which benefits are payrolled and explains how variable benefit amounts are calculated for accurate record-keeping.

5. Internationally-mobile employees

   How will you report BIKs for your internationally-mobile employees from April 2027 if you aren’t operating a modified payroll process? Benefits as they arise will be taxed rather than at year end adjustments via modified payroll. You may need to consider estimating taxable values at the beginning of the year rather than adjusting in-year or at year-end.

The increased number of calculations and the quantum of tax being collected through the payroll increases the chances of errors. To make sure you are aware of any potential risks, you should test your systems thoroughly. HMRC have said they will adopt a "soft touch" for the first year of mandatory payrolling of benefits, but employers should not expect that to continue.